Banco Macro S.A. (BMA) Q3 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's Third Quarter 2018 Earnings Conference Call. We would like to inform you that the third quarter 2018 press release is available to download at the Investor Relations website of Banco Macro at www.ri-macro.com.ar. Also, this event is being recorded and all participants will be in listen-only mode during the company's presentation. After the company's remarks are completed, there will be a question-and-answer session. At that time, further instructions will be given. [Operator Instructions] It is now my pleasure to introduce our speakers. Joining us from Argentina are Mr. Jorge Scarinci, Chief Financial Officer; and Mr. Nicolás Torres of Investor Relations. Now, I will turn the conference over to Mr. Nicolás Torres. You may begin your conference. Nicolás Torres: Good morning and welcome to Banco Marco's third quarter conference call. Any comments we may make today may include forward-looking statements, which are subject to various conditions and these are outlined in our 20-F which was filed to the SEC and is available at our website. Third quarter '18 press release was distributed yesterday and is also available at our website. As from fiscal year 2018, Banco Macro results are reported under communications A6114 of The Central Bank of Argentina. Peers for fiscal year 2017 have been restated in accordance with IFRS and some items have been reclassified in order to make a comparison between previous possible [ph]. I will now briefly comment on the bank's third quarter '18 financial results. Banco Macro's net income for the quarter was Ps. 3.8 billion, 22% or Ps. 700 million higher than two quarter of '18, and 39% higher than the Ps. 2.8 billion posted a year ago based on an increase in net interest income and an increase in net fee income. The bank's third quarter '18 accumulated ROE and ROA of 27.8% and 5.6% respectively, remains healthy until the bank's earning potential. Net operating income for third quarter '18 was Ps. 12.9 billion, increasing 41% or Ps. 3.7 billion year-over-year. Operating income was Ps. 5.5 billion, 31% or Ps. 1.3 billion higher than a year ago. In the quarter, net interest income totaled Ps. 10.3 billion, 14% higher than the Ps. 9 billion registered in 2Q '18, and 17% higher than the result posted one year ago. This performance can decrease to a 90% year-over-year increase in interest income and a 133% increase year-over-year in interest expenses. Within the interest income, interest on loans grow 19% quarter-over-quarter due to an increase in the average lending rate. In 3Q '18, interest on loans represented 73% of total interest income. On a yearly basis, interest from loans grow 72% or Ps. 5.2 billion. Net income from government and private securities increased 39% or Ps. 1.3 billion quarter-over-quarter mainly due to higher lending's [ph] volume. Compared to 3Q '17, net income from government and private securities increased 168% or Ps. 2.8 billion. In 3Q '18, differences of imported prices foreign currency decreased Ps. 232 million, totaling Ps. 1.2 billion loss. As a consequence of the 42% Argentine Peso depreciation against the U.S. Dollar and the bank short FX procedures. It is worth mentioning that income related to government and private securities and lowest AAA companies more than compensated the short FX procedure loss. In 3Q '18, interest expenses totaled Ps. 6.5 billion, a 43% or Ps. 2.2 billion increase compared with 2Q '18, and 133% or Ps. 3.7 billion higher on a yearly basis. Within interest expenses, interest on deposits increased 47% or Ps. 1.8 billion quarter-over-quarter mainly driven by a 22% increase in the average volume of time deposits and a 334 basis points increase in the average time deposit interest rates. In 3Q '18, interest on deposits represented 88% of the bank financial expenses. As of 3Q '18, the banks accumulated net interest margin worth 15.2 and changed from 2Q '18 and wider than in 3Q '17. In 3Q '18, net fee income totaled Ps. 2.1 billion. On a yearly basis, net fee income increased 32% or Ps. 500 million. In the quarter, other operating income increased 44% or Ps. 610 million. Other income has been south [ph] with Ps. 567 million increase related to the buyback of our corporate bonds. On a yearly basis, other operating income increased 89% or Ps. 935 million. In 3Q '18, Banco Macro's personnel administrative expenses totaled Ps. 4.5 billion and increased 13% quarter-over-quarter. Employee benefits increased 11% quarter-over-quarter as a result of salary increases average [indiscernible]. Compared to 3Q '17, general, administrative and personnel expenses increased in 3Q '18 to 44%. As of September 2018, the accumulated efficiency ratio reached 38.9% improving from the 41.2% posted in 3Q '17. This was as a result of a 12% increase in expenses and a 21% increase in net interest income, net fee income and other operating income as a whole in 3Q '18. Banco Macro continues to be the most efficient bank in Argentina. 3Q '18 Banco Macro expected income tax rate was 30.9% compared to 35.6% in 3Q '17. Statutory tax rate was cut [ph] in the latest tax reform bill and as of January 2018 stands at 30% and with further reviews in January 2020 to 25%. In terms of loan growth, the bank financing to the private sector grew 11% quarter-over-quarter, 43% year-over-year. It is important to mention that Banco Macro's market share over private sector loans as of September 2018 reached 7.5%. On the funding side, total deposits grew 18% quarter-over-quarter and 56% year-over-year. Private sector deposits grew 20% quarter-over-quarter and 60% compared to 3Q '17 when private sector deposits increased 3% quarter-over-quarter. As of September 2018, Banco Macro's transactional accounts represented approximately 46% of total deposits. Banco Macro's market share over private deposits as of September 2018 totaled 6.8%. In terms of asset quality, Banco Macro's non-performing to total financial ratio reached 1.63%. The coverage ratio reached 131.05%. Banco Macro continues to show outstanding asset quality metrics with one of the lowest NPL ratios and highest coverage ratio in the industry. In terms of capitalization, Banco Macro accounted an excess capital of Ps. 44.1 billion which represented a total regulatory capital ratio of 26.4% and a Tier 1 ratio of 18.9%. The increases in regulatory capital ratio of 120 basis points and Tier 1 ratio of 260 basis points originated from the share buyback program. During 3Q '18, the repurchased 21.4 million shares for a total amount of Ps. 3.1 billion. The bank's aim is to make the best use of this excess capital. The bank's liquidity remained more than appropriate, liquid assets total deposit ratio reached 51.7%. Overall, we have accounted for another positive quarter, we continue showing that whole financial position. Asset quality continues under control and closely monitored. We keep on working to improve our efficiency standards and we have one of the cleanest balance sheets in Argentina banking sector and we keep a well-optimized deposit base. At this time, we would like to take the questions you may have.

[Operator Instructions] The first question comes from Alonso Garcia with Credit Suisse.

My question is regarding the quality; I wanted to hear your thoughts on the out [ph] before the next couple of quarters, in particular, as you're seeing we have reached a stage already in terms of proper risks and NPL formation wherein this quarter already you believe we should expect further deterioration [ph] before seeing a recovery. And also related to that, and we have seen the coverage ratio declining for consecutive quarters, and in particular, provisioning of new NPLs in the past couple of month have looked normally low, so I want to feel from this front and what we should expect there the coverage ratio to [indiscernible]?

According to your first question in terms of asset quality, we have commenting in the previous quarters on conference call, sorry, that because of the economic situation in Argentina and the recession that we were undergoing, we proactively started to stop the lending machine, I would say that's close to mid to the second quarter of this year, we started doing that. And a consequence of having a good asset quality is because we stopped lending maybe before our peers plus that we have been commenting that asset quality is going to deteriorate because of the recession and we think that we are going to see fourth quarter of this year, and also maybe first quarter of next year with -- I could say weak economic conditions and of course, this is going to impact the NPL ratio, not only Banco Macro but also in the system [ph]. So, we think that we might see in the next two quarters some additional deterioration in asset quality, maybe reaching 2% by the end of the first quarter of next year and -- but that is something that we are forgetting. And in terms of the coverage ratio, because it sounds that in almost one year ago we decided to build up a cushion there to lift the coverage ratio to level that go to 190% and the idea of that is to use that cushion in some period of time with weak economic conditions, and that is the time for the second and third quarter of this year, maybe also the fourth quarter. So the idea was to build up the cushion and use it in this quarter, so the idea of the bank is always to be about 100% of coverage ratio. I think that 120%, 130% could be something reasonable to forecast in the next couple of quarters and also in the long run.

Our next question comes from Nicolas Riva with Bank of America.

Just two questions; the first one on this income that you reported from financial assets at fair value, the Ps. 499 million, you did include higher income from the investment portfolio. What's the nature of that? Is that mostly realized like cash gains from the portfolio or mostly paid per mark-to-market behind this? And then, my second question on the financial agency agreements say that you renew the agreement with a Province of Misiones; I believe that you had also run the same thing with Tucumán, if you can do an update on the status of the agreement with [indiscernible]? Nicolás Torres: I would start answering your second question first. Yes, on the agreement that we have renewed it was, as we have been commenting this for many times; we have had no problem to renew that in the past and we are demonstrated that we have no problems to renew them in these times. We have excellent relationship with the Provinces and that's why we are -- we have been able to renew this contract for another 10 years. So basically, that was easygoing, no problem, and in the relation with Salta en, we're you asking about Salta en, the other province?

[Indiscernible]. Nicolás Torres: Well, those are arguing 224 and onwards, so that is like 6 years more to go, so we have to wait a little bit to renew them but I would say that there will be no problem there but it's too far to answer today. In relation to your first question; yes, basically that's income from securities that were sold in the quarter or basically the word mark-to-market in the quarter.

Our next question comes from Gabriel Nobrega [ph] with Citi.

I actually wanted to know a bit more of this, I'm short dollar provision that you have. If I'm not mistaken, in the previous quarter conference call, you guys said that you would be willing to maybe reduce this position, however during the quarter we saw an even bigger loss, the more we had seen in the second quarter. So here I would just like to maybe understand, how should we look at this short position going forward? And if we should expect maybe another loss in the fourth quarter? And I'll make a second question afterwards.

As we go to Page 13 of the press release, there you have a chart on the foreign currency position and the last word there, you can see the reduction between the second quarter and third quarter in terms of the position or sold on effect that go -- went from $142.9 million to $97.6 million. So that was a reduction that we were commenting in the previous quarter, however, the big jump that we saw in the FX at the end of September resulted in the result of almost Ps. 1.2 billion loss that we accounted there. However, as we have been explaining in the previous quarter conference call and also in this press release, with those pesos that we received or we got from the sole position of the FX, we have been best-in-class in [indiscernible] and also loan to AAA company that more than compensated this Ps. 1.2 billion loss. So that is the answer to your question.

And I actually have a follow-up; you said that you expect maybe asset quality to further deteriorate given the macro economic scenarios. I thought here could you maybe just talk about is there any sector or is there any part of your loan book that you're more worried with than the others? Nicolás Torres: I would say that also as we have commented before on the consumer, basically on the open market, even though we have a very small exposure there, only 7% of our personal loans are on open markets, basically we called open markets to those people that do not receive their salaries in Banco Macro. So in that segment we saw a bit more risk than in the others, and also on the corporate sector, in SMEs basically; sectors I would say maybe construction, some industrial machinery, maybe auto parts, but as a whole I would say that the whole economy is suffering, so more or less all the sectors are having negative performance when they are compared to a year ago but we are not finding a one specific sector where we are very concerned basically.

[Operator Instructions] Our next question comes from Carlos Gomez with HSBC.

I wanted to ask you about the buyback that you executed a large portion of this quarter, the progress has been reopened. Do you continue to consider that a good use of your capital and do you need to hit the price target [indiscernible] for you to continue buying back stock? Second, as part of your investment, in the past you have built a portfolio of Argentine equities and we're actually able to sell and time the sale quite well. Are you buying Argentine equities today? Thank you. Nicolás Torres: On the buyback, basically that was as efficient as the board took at that time because the pry [ph] was going down and I would say that we decided to put in place a big buyback program that was split in two or three different in moment. For the moment, the board is not considering another buyback program but it will depend also on market conditions but for the moment is not under consideration. In terms of your second question about building portfolio on Argentine companies, no, for the moment we are not considering that, also it will depend on market conditions.

And a follow-up, do you obviously -- I see that you've stopped growing, you have grown less than the other 26% year-on-year Pesos. I know it's hard to say but when do you think you will reopen the tap [ph] and would you -- how much would you expect to grow this year? Nicolás Torres: I mean, we have to say that Argentina with the new agreement with the IMF is trying to reach a balanced fiscal account for next year, and also until June next year a 0% increase in the monetary base, so that is a very tight monetary and fiscal program. So the idea is that we are forecasting next year to grow our loan book in similar levels than we placed under this to say between 25%, 28%, that is the forecast that we are working as of today.

Can you remind us how much you expect inflation to be this year? I mean what was the starting point for your loan portfolio? Nicolás Torres: For this year, inflation is expected to be between 45%, 46%.

There are no further questions at this time. This concludes the question-and-answer session. I would now turn over to Mr. Nicolás Torres for final considerations. Nicolás Torres: Thank you all for your interest in Banco Macro. We appreciate your time and look forward to speaking with you again, good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.